Metals prices extend losses on doubts about further stimulus

By John Nadler
Spot metals prices extended their losses as the markets opened for the final session of this week in New York this morning. This week will mark the second one in a row of value declines in gold and silver as market participants continue to show doubts about further stimulus coming from the Fed or China's central bank.

When it comes to China, it seems that gold is now unable to benefit from either bullish or bearish economic news from that country. On one hand, the gold bulls are nervous about the hitherto slowing Chinese economy and the impact that this will have on overall commodity demand. We reported earlier this week that Chinese gold imports from Hong Kong recorded a 29% decline in August.

A slowdown in new money creation by China also makes gold bulls uneasy. On the other hand, the slightly better economic news coming from Beijing this week (industrial value-added output, September retail sales) have also dented gold prices as players figure that economic stabilization might imply no monetary easing on the horizon courtesy of the PBOC and it encourages them to play in other, more risky assets.

Meanwhile, the nebulous situation in Europe continues to unnerve speculators as well, despite the ability of the euro to post a gain on the week against the US dollar on the back of hopes that EU leaders will create a supervisory bank for the region by year's end.

Gold prices fell to a low of $1,730 in early trading, once again breaching the putative support figure that market technicians believed was to be found at the $1,737 level. For the moment, several observers are characterizing the gold market as one that has shifted back into a classic physical commodity market.

Jonathan Barratt, the CEO and founder of Barratt's Bulletin told CNBC that there will be selling in the gold ETF if the yellow metal continues to come under price pressure. Barratt is cautious on gold but is adopting a "buy on dips" approach for the time being. He did note that gold ETF selling could be the result of prior sell-offs which could take place in the equity markets (remember, this is October, after all).

The economic metrics coming from the USA this week continued to point to a recovery that has 'legs.' The Philly Fed and the American leading indicators index showed improvements in overall conditions, with the latter posting its best gain in seven months. The numbers came on the heels of earlier statistics during the week that revealed the best housing starts in four years in the US. Thus, the Fed's commitment to some kind of indefinite QE3 asset purchase program came under immediate questioning by those who were so confident about such accommodation for the better part of August and September.

Interestingly, the very factor that helped gold prices rise by about 11% in recent weeks is the same one that is now pulling them back down to these lower levels. Yes, here we have the two sides of QE3: friend and foe - in just a matter of days. Trading NRG sums it up as follows: "One of the main factors that could have adversely affected the price of gold was the anticlimax that came soon after the FOMC made its decision to launch QE3."

If that is somewhat counter intuitive, read on: "There are some who think that QE3 won't have an adverse effect on the value of the USD. After all, despite the launch of QE1 (back in 2008) and QE2 (back in 2010), the value of the USD hasn't crashed against other leading countries' currencies and the U.S inflation sans energy and food hasn't risen above the Federal Reserve's target inflation.

According to the recent U.S CPI report the core CPI (excluding energy and food prices) rose by only 2% during the past 12 months. This could be among the reasons to curb the demand for gold as a safe haven against the potential crash of the USD."

Silver lost 1.25% and dipped to the $32.40 bid level while the PGM complex also headed lower. A month-long strike at Gold Fields in South Africa ended this morning but 1,500 workers were still sacked and wildcat strikes continue to plague other gold and PGM producers. Anglo American Platinum's month-long strike continues without a solution in sight and it has already resulted in the firing of 12,000 miners.

Since August more than 80,000 South African mine workers have downed their tools in actions over pay and working conditions. We do not yet have an accurate idea of how much precious and noble metals production was lost since the advent of these confrontations. Platinum declined $15 to $1,629 per ounce and palladium fell $6 to the $636 per ounce bid figure. In the background, the US dollar advanced to the 79.52 mark on the trade-weighted index and crude oil made very modest upside progress with a 20-cent gain to $92.23 per barrel.

Speaking of mining-related developments, we are happy to report that on Thursday the World Gold Council published what it calls a "Conflict-Free Gold Standard." Under the precepts of the Standard, any WGC member of prospective applicant firm will be expected to make public statements relating to their conformance to it.

In trying to address these long-standing and serious problems in global gold mining, the WGC said: "The gold industry is committed to working to promote the stability and prosperity of the countries where it works. Assisting countries out of poverty and empowering citizens through the improvement of health, education and infrastructure helps, in turn, to strengthen institutions and to make conflict less likely to destabilise a society. It is crucial that, in taking steps to combat the potential misuse of gold, legitimate producers are still able to find their way to market. That is one of the objectives of the World Gold Council Conflict-Free Gold Standard."

We close today with a bit of modern-day...alchemy. The New York Times carried a story on Monday about a Princeton University scientist –Prof. Paul Chirik- who has possibly pulled off a feat that many before him have tried (unsuccessfully) for hundreds of years: turning base metals into precious ones; in this case, turning ordinary iron into platinum. Now, we are not talking about an actual transmutation whereby one takes a rusty nail and -presto chango! – turns it into platinum that is suitable to wear as a wedding band. Chirik, on the other hand, has taught lowly iron how to behave like the noble metal that is so indispensable to many industries.

While the development is not tantamount to concluding that using platinum in numerous critical applications is a thing of the past (or that it must thereby fall to $100 an ounce), it does potentially open the path towards a future of flexible manufacturing processes wherein certain, more abundant metals could be employed to perform the catalytic functions that PGMs are well-known for.

In addition, new types of plastics could see the light of day; ones based on low-cost basic ingredients. Interesting but little-known fact number 985: Did you know that your old pair of Levi's contains unrecoverable platinum particles?

(The author is the senior metals analyst - Kitco Metals)